High Viscosity Digital Printing And EV Battery Coatings Will Drive Long-Term Upside

Catalysts

About Xaar

Xaar develops and manufactures industrial inkjet printheads and fluid management systems that enable high viscosity digital printing and coating in demanding applications.

What are the underlying business or industry changes driving this perspective?

• Scaling adoption of digital EV battery insulation as 800 volt platforms proliferate, with Xaar positioned as a leading printhead supplier on existing Chinese lines and future global capacity additions. This supports multi year growth in printhead unit sales and recurring replacement demand, which could help accelerate revenue and normalize earnings.
• Transition in automotive manufacturing from manual graphics and decals to fully digital coating solutions using robotics and high viscosity printheads. This enables fee per car and rental models that could structurally lift gross margins and expand operating leverage as installed volumes ramp from 2026 onward.
• Move by OEMs and consumers toward affordable, high quality full color desktop 3D printing, where Xaar’s technology underpins multiple new machines and a larger installed base. This is driving a higher mix of premium printheads, deeper OEM penetration and rising replacement cycles, which in turn supports both top line growth and potential margin improvement.
• Rapid share gains in the jewelry wax and broader wax applications as customers shift to higher precision, lower waste digital manufacturing. This is turning a nascent segment into a larger share position for Xaar that can expand through new variants of the Xaar 2002 head, potentially underpinning higher division profits and more resilient cash generation.
• Reallocation of installed manufacturing overcapacity from commoditized ceramics to higher value industrial applications, combined with disciplined cost control and better stock turns. This allows incremental revenues from battery, automotive and 3D printing to drop through at higher incremental margins, which may improve net margins and earnings quality.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Xaar's revenue will grow by 19.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from -18.3% today to 11.0% in 3 years time.
• Analysts expect earnings to reach £11.9 million (and earnings per share of £0.1) by about December 2028, up from £-11.6 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 15.3x on those 2028 earnings, up from -8.2x today. This future PE is lower than the current PE for the GB Tech industry at 64.1x.
• Analysts expect the number of shares outstanding to decline by 0.47% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.61%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The long term EV battery insulation opportunity depends on industry wide adoption of inkjet coating for 800 volt platforms. If manufacturers stick with PET film or improve spray technologies instead, expected replacement driven printhead demand may not materialize, which would limit revenue growth and pressure earnings.
• The shift to digital automotive coating could be slower or smaller than anticipated if carmakers defer capital investment, remain cautious about new paint processes or favor competing solutions. This would delay ramp up of fee per car and rental based income and constrain margin expansion and net profit.
• Desktop 3D printing demand, especially for consumer focused full color systems, may prove cyclical or niche if broader adoption stalls or cheaper monochrome printers remain dominant. This would cap the scale of the installed base and reduce future printhead replacement driven revenue and operating leverage.
• Reliance on rapid jewelry wax growth and a few large OEMs increases concentration risk. If competing technologies regain share or Xaar’s higher reliability extends replacement cycles more than expected, unit volumes and recurring sales from this segment could undershoot expectations and weigh on group margins and earnings.
• Macroeconomic and policy headwinds such as tariffs, investment uncertainty in U.S. manufacturing and potential slowdowns in Chinese and broader industrial demand could continue to hurt divisions like EPS and Megnajet. This could restrain consolidated revenue growth, keep gross margins flat and prolong net losses.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of £1.83 for Xaar based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £2.0, and the most bearish reporting a price target of just £1.6.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be £108.2 million, earnings will come to £11.9 million, and it would be trading on a PE ratio of 15.3x, assuming you use a discount rate of 8.6%.
  
• Given the current share price of £1.2, the analyst price target of £1.83 is 34.5% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.